NBU Raises Key Rate to 16% as War-Driven Inflation Tops Forecast

The National Bank of Ukraine (NBU) raised its key policy rate to 16% from 15.5% on Thursday after inflation came in slightly above the central bank’s forecast and growing concerns emerged over the economic impact of Russian strikes on major civilian businesses. The move marks the second increase in recent months, following a 0.5 percentage point hike in July. The NBU said the move aimed to contain inflationary pressures, driven mainly by higher fuel prices linked to the escalation of conflict in the Middle East, along with faster growth in some administrative tariffs, largely a consequence of Russian strikes on critical infrastructure.JOIN US ON TELEGRAMFollow our coverage of the war on the @Kyivpost_official. Consumer inflation accelerated to 8.1% year-on-year in August, slightly above the trajectory laid out in the central bank’s July 2026 Inflation Report. “Underlying price pressures is fueled by persisting growth in businesses’ production costs, in particular for energy, logistics, and labor. Economic agents’ inflation expectations have also been elevated,” NBU governor Andriy Pyshny said during the monetary press briefing on Thursday, where the NBU board presented the decision. The global pricing environment also remains inflationary amid the war in the Middle East, prompting more central banks worldwide to raise rates. Previously, the European Central Bank raised its three key interest rates by 25 basis points, while the US Federal Reserve increased its target rate range to 3.75%-4% from 3.5%-3.75% in response to the prolonged conflict. However, the Bank of England held its interest rates at 3.75% Other Topics of Interest Ukraine Repatriates 252 Bodies From Russia Forensic specialists will examine and identify the remains before they can be returned to families for burial. ERA Loan-2 and Russian assets as collateral According to the NBU, Ukraine’s inflation will likely be constrained by ample domestic food supply, even as Black Sea shipping difficulties complicate grain exports. The bank expects inflation to return to a slowing trajectory in 2027, aided by its own monetary tightening. Despite Russian attacks, the labor market and consumer demand have stayed resilient. Average wages continued growing at a high pace in July and, according to NBU estimates, in August as well, adding to underlying price pressure. Lower-than-expected official financing in July and August forced the government to pursue a tighter fiscal policy and contributed to a decline in international reserves. The NBU noted that a significant share of external assistance is tied to reform progress, including parliament’s long-suffering adoption of bills required under Ukraine’s foreign aid programs. If lawmakers approve the necessary measures in the coming months, the central bank said most of the shortfall in external financing would be covered. Replying to a Kyiv Post question, Pyshny said Ukraine’s economic bloc is working on two parallel tracks to help finance a war-driven budget deficit. This would include collateral from Russia’s immobilized assets and a possible second Extraordinary Revenue Acceleration (ERA) loan. Ukraine received the first ERA loan, created from profits generated from Russian assets worth $50 million, signed at the end of 2024. As a result, it became a key tool in financing Ukraine’s budget in 2025-26, partly extending into 2027. To cover the 2027 gap, the last remaining option is the leftovers of Russian assets as collateral. But beyond Russian assets left in Belgium’s Euroclear, others are located in other jurisdictions. “The total amount of sovereign Russian assets may reach up to €210 billion ($243.6 billion) in the EU countries. Revenues from €180 billion ($208.8 billion) of Russian assets held in Euroclear backed provision to Ukraine of €45 billion ($50 billion) under the Extraordinary Revenue Acceleration (ERA) loan. Then €90 billion ($102 billion) was provided under the Ukraine Support Loan, implicitly guaranteed by frozen assets in the EU. But we can discuss using a larger amount as ‘collateral’,” a person familiar with the matter told Kyiv Post. “Theoretically, it’s possible to work with the Belgians – to meet the demands that other European countries and the European Commission were unwilling to meet last year,” the person added. War remains the biggest risk Pyshny said the course of Russia’s full-scale invasion remains the main risk to both inflation and economic growth, alongside uncertainties surrounding international financing and the prolonged conflict in the Middle East. Additional budget needs for defense and reconstruction, and wage pressure from a deepening labor shortage and negative migration trends, could add to price pressure. At the same time, a worsening security situation could cool consumer demand and weaken the labor market, exerting a disinflationary effect. “Expensive energy resources limit Ukraine’s economic growth while also fueling Russian aggression,” the NBU wrote, pointing to rising oil prices tied to the war in the Middle East as a growing risk since its July forecast. It added that a more favorable scenario remains possible if international partners strengthen military and financial support, and if Ukraine makes substantial progress toward a just and lasting peace. Additionally, the NBU wrote that July’s rate hike already prompted smaller banks to raise deposit rates in response, while a fresh hike will not slow lending, noting its longest period of credit expansion on record. The central bank said it stands ready to tighten policy even further, but only if inflation risks intensify significantly. However, NBU would consider easing monetary conditions if a worsening security situation leads to a substantial slowdown in consumer demand and a weakening labor market in the coming months. Olena Hrazhdan is the Business Reporter at Kyiv Post, covering Ukraine’s markets, business, and economic policy. While she reports broadly on economic issues, her core focus is banking, finance, monetary and fiscal policy. Olena previously wrote for leading Ukrainian business media and became a Fellow of the International Monetary Fund’s Journalism Fellowship in 2024.